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Positive turn for the ringgit?

Mar 26, 2016

MANY people are wondering whether it is time to turn positive on the ringgit, after the emergence of several favourable developments that augur well for the ­currency.

Year to date, the ringgit has strengthened about 5 per cent against the US dollar and 9 per cent from the weak level of 4.46 to the dollar in September last year. It went below the psychological level of 4.0 to a dollar on Tuesday, hitting a seven-­month high.

This occurred on the back of a reverse flow of foreign funds into our bond and stock markets.

"We have seen net positive ­foreign institutional flows in the last two months, a reversal from net selling for the most part of 2015 - the foreign ownership ratio rose from 22 per cent in January this year to 23 per cent in February," said AmInvestment Bank in a note on March 18.

The recent weakness in the US dollar had helped drive the return of foreign funds to Asia, including Malaysia.

Coupled with the EU and Japan embracing negative interest rates, foreign ownership in Malaysian government bonds has risen to 47.9 per cent in January this year from a low of 45.6 per cent in September last year.

The inflow drove 10-year MGS yield down to 3.9 per cent, from the peak of 4.4 per cent in August last year, implying a lower risk-free rate, according to AmInvestment Bank.

Unlike previously, there are now more foreign governments and central banks holding Malaysian government bonds, according to Bank Negara Malaysia (BNM) on Wednesday. There is now 29 per cent held by these two groups and 13 per cent by pension funds.

"As such groups are generally considered long-term investors, the risk of sudden and massive ­outflows of capital in the event of unfavourable economic conditions is now lower than before," ­comments Nor Zahidi Alias, chief ­economist at Malaysian Rating Corporation Bhd.

"However, we remain cautious about the relatively huge portions of bonds held by asset managers (44 per cent) who tend to respond rather quickly to economic and market conditions," he adds in an e-mail interview with Sunday Star.

As a consequence of foreign inflow, BNM's foreign exchange reserves have risen. The reserve is a buffer against capital flows and has impact on the ringgit.

International reserves rose to RM412.3bil (S$131 billion) as at March 15, from RM408.5bil as at Jan 15 this year.

The ringgit strength was also supported by a recovery in crude oil prices. The current oil price of around US$40 (S$54.80) per barrel represents a 43 per cent rebound from their low in mid-January this year of US$27.88 (RM112).

"Based on the historical relationship, the crude oil price of around US$40 per barrel is consistent with the ringgit at about RM3.95 to RM4.15 per dollar. Going forward, a further and sustained recovery in crude oil prices will likely continue to benefit the ringgit," Zahidi remarks.

The central bank has said that based on fundamentals, the ringgit should be 3.8 to a dollar.

Despite all these positive develop­ments, a major inter­national rating agency is not about to revise its prediction on the exchange rate.

Christian de Guzman, Moody's vice-president said: "We are seeing fluctuations in exchange rates, and the potential for a lot of volatility is still high. We are maintaining the rate conservatively at 4.20 for the year."

He is not alone. A local former banker with a prominent financial institution who still monitors financial developments said: "It is too soon to turn positive on the ­ringgit."

According to him, the ringgit rose sharply on Tuesday and Wednesday mainly due to the ­conclusion of the sale of 1MDB's energy assets to China's state-owned China General Nuclear Power Corporation for RM9.83bil.

"The absorption of all the debts of Edra Global Energy Bhd has reduced the systemic risk to public finance, banking system and ­economy. This has helped to boost investor confidence," said the ­former banker.

The ringgit was also possibly ­lifted by a statement from China Railway Engineering Corporation on Monday that it would invest US$2bil (RM8.1bil) to set up its Asia-Pacific regional headquarters in Kuala Lumpur, in addition to taking up a significant stake in the Bandar Malaysia project.

This China state company, all ready to bid for the Kuala Lumpur-Singapore High Speed train project, also promised to bring in more Chinese investments into Malaysia.

On the external front, conflicting reports on how many times the US Federal Reserve (Fed) will raise its rates for 2016 have added ­uncertainty to the foreign exchange ­market.

Goldman Sachs Group Inc, one of the world's top 10 foreign-­exchange traders, is holding fast to its bullish dollar stance.

According to news reports, its economists predict that the US would see stronger economic data ahead and this will force the Fed to raise interest rates three times this year, and consequently the greenback would rise.

On the domestic front, the ­market is closely watching the upcoming change in BNM.

"The sentiment for the ringgit will turn negative if the new ­governor appointed is a politician or a less competent professional," said one market observer.

And in general, Malaysia's ­economic growth - projected by the central bank to be 4 per cent to 4.5 per cent this year - is still vulnerable to ­policy decisions in developed ­countries, fluctuations in inter­national oil and commodity prices as well as external financial markets shocks.